Erste Group Bank AG
VSE:EBS
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Erste Group Bank AG
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[Audio Gap]
quarter results 2023 conference call of Erste Group. My name is Priscilla, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions]
I will now hand you over to your host, Thomas Sommerauer, to begin today's conference. Please go ahead, sir. Thank you.
Thank you very much, Priscilla, and good morning also from my end to everybody who is listening in. Today's call will, as usual, be hosted by Willi Cernko, our Chief Executive Officer; Stefan Dorfler, our Chief Financial Officer; and Alexandra Habeler-Drabek, our Chief Risk Officer. They will present to you the highlights of the past quarter, after which they will be ready to take your questions.
Before handing over to our CEO, I would also like to draw your attention to a disclaimer on Page 2. And with this, Willi, take it away, please.
Thanks, Thomas. Ladies and gentlemen, good morning from my end as well, and welcome to this conference call. I'm happy that I once again can present to you a quarter that is better than expected and that produced sufficient evidence to upgrade our guidance for '23. But before I talk about the outlook, let me kick off the presentation on Page 4 with our first quarter financials.
To cut the long story short, we made a flying start to the new year. Many of the trends that we have seen over the past quarters have continued in the first quarter. There are strong revenue momentum, driven primarily by net interest income, but also a good fee performance, underlying cost uplifts broadly in line with expectations and a continued favorable credit risk environment. All of this led to a strong bottom line improvement, both quarter-on-quarter as well as year-on-year, despite the usual upfront bookings of annual deposit insurance and resolution fund contributions as well as the banking tax in Hungary. All in all, I can say I'm very satisfied with the P&L performance.
Looking at our P&L dashboard on Slide 5. Our key P&L metrics fully reflect our strong profitability. Net interest margin is up significantly. The cost/income ratio improved dramatically year-on-year and even quarter-on-quarter, and the risk cost ratio is barely visible. Earnings per share are up, as is return on tangible equity.
Accordingly, we have reviewed our 2023 financial guidance and upgraded many line items. We now expect a cost/income ratio of about 51% for '23 already, primarily driven by better core revenue growth; a risk cost ratio of less than 25 basis points as opposed to 35 basis points previously; and an unchanged ROTE of 13% to 15%. Although, with the upgrades we have done, we clearly target the upper end of this range of 13% to 15%.
Turning to the balance sheet on Page 6. We see that customer volume growth showed averaging trends. Customer deposits jumped, led by increased corporate and financial institution deposits and supported by stability of our strong retail franchise. The good news is that global banking market jitters have not translated into any deposit outflows, which to us was not surprising, as we operate national champions with strong brand names in many of our core markets. We are the go-to place in times of uncertainty and this time it was no different.
At the same time, loan growth continued to slow in the first quarter on the back of 3 main reasons: the combination of economic slowdown and inflation, significantly higher interest rates and the tough comparison with '22 in which we benefited from an exceptional demand for corporate loans.
All other balance sheet items performed in line with expectations compared to year-end '22, including the whole to-collect portfolio that everybody was focusing on a couple of weeks ago.
Moving to our key balance sheet indicators on Slide 7. Our loan-to-deposit ratio returned to where it was 2 quarters ago, around about 85%, reflecting significant deposit inflows in the quarter and the stable loan stock. Asset quality remained exceptionally strong despite the more challenging macro backdrop. Our pro forma CET1 ratio, factoring in interim profit and the technical dividend deduction, improved to 14.4%, while the liquidity coverage improved and net stable funding ratio remained stable. The leverage ratio remained among the best in the industry. As we have announced a quarter ago, we are committed to buying back shares in the amount of EUR 300 million in '23 and have already filed an application with ECB seeking approval of such a buyback.
And with this, let's now have a look at the operating environment. I'm on Slide 9 now. The economic forecast for '23 hardly changed over the past 2 months. It's consensus that economic growth will slow down this year. In one or the other countries, a technical recession is possible or already underway. And that inflation will stay elevated in most of our markets before moderating. And this in turn means that interest rates will probably also stay higher for longer.
One thing seems to be certain and that is that inflation has seen its peak in all our markets. The main reasons for this are lower energy prices and generally lower import prices on the back of strong currency appreciation, especially in Czechia and Hungary. This trend will also lead to an improvement in external and fiscal balances. Tight labor markets will, of course, slow this inflationary trend but are also key for maintaining consumer demand and keeping asset quality strong.
So to summarize it, the economic picture in Central and Eastern Europe should remain robust during '23 and the outlook for '24 is definitely a much brighter one.
Against this mixed macro background, the performance of our retail business has been strong. That's particularly true for the liability side. It is not common to maintain a stable retail deposit base at a time when customers are facing significant inflationary pressures and increasingly have higher-yielding investment alternatives, but we managed to achieve this. At the same time, we posted strong growth in the stock of security savings plans, thereby confirming the positive trend that started in the second half of '22. So there are growth opportunities out there and we are taking advantage of them.
As regards to deposit pass-through, and Stefan will be more detailed on this later, retail pass-through rates are rising, but still moderately. And customers, while gradually shifting some overnight deposits into term and savings accounts and to investments, of course still maintain the largest portion of their deposits in current accounts.
In terms of loan growth, while not matching last year's strong performance, there were some bright spots that are worth mentioning. The rate of decline in housing loan new business volumes declined considerably quarter-on-quarter. And in some key segments, such as Erste Bank Oesterreich and Czechia, we already saw quarter-on-quarter increases in new mortgages sales. And last but not least, demand for consumer loans also recovered in the first quarter on a sequential basis, which led to a year-to-date stock increase of 1.8%.
Moving to the corporate market -- Corporates & Markets business on Page 11 and continuing on the lending topic. The growth moderation continued in the first quarter of this year, driven in particular by the large corporate business and resulting from a weak investment appetite as a result of the economic slowdown. The pictures are different on the liability side, where we saw significant growth as customer deposits flowed in. This development was most pronounced in the Czech Republic, mainly on account of increased repo business with public sector entities. The trend of deposit inflows was also visible in Slovakia, and to a lesser extent, in the other markets. So overall, a pretty reassuring picture.
And the story of deposit inflows did not end here. We also enjoyed some strong inflows in the group markets business as asset management companies increased their balances in settlement accounts. Other than that, client markets business also performed well. The stock markets had a good start to the year and clients again ventured into the markets.
This development also helped our asset management business, which enjoyed strong sales growth in such markets as Czechia and Hungary and registered a solid increase in assets under management once again, surpassing EUR 70 billion mark.
Let me now spend a minute or 2 on George because digital leadership is equally important for our retail and corporate businesses. I'm on Page 12 now. George is a real growth story, not only in terms of retail user numbers where we crossed the 9 million mark, but also in the sense that it has a smaller sibling now, called George Business, that has the aspiration to do at least as well as George. And it has a lot going for it. It's a completely new business banking platform that is designed from scratch and cloud-native. Similar to George, it is one uniform platform that fully scales across all our markets. It is capable of fast and fully digital client onboarding, allows mobile access for handling your business finances on the go and handles single as well as multicountry businesses with ease. All in all, we are setting a new standard for business banking that will go a long way to ensure our long-term competitiveness.
We are now in full rollout in Austria, where we have already activated more than 2,500 licenses, and another 1,500 will follow at the beginning of May. And this, of course, is only the start. We will bring George Business to all our markets, one by one, and expand its capabilities further over time. When this happens, you can expect regular updates from us.
But now I hand over to Stefan for the operating trends.
Thanks very much, Willi, and good morning, everyone. Willi already talked about loan demand and there is really little to add. The first quarter has been overall flattish on a consolidated basis, and please take also into account the currency appreciation of the Czech koruna and the Hungarian forint. And for the holding, i.e., the segment Other Austria, the expiry of a few larger positions caused the quarterly drop. We are coming from a very high base and expected this consolidation. The annual growth assumption of approximately 5% for the year 2023 remains, therefore, unchanged.
Let's move to Page 15 and deposits. Especially in light of recent events in the U.S. banking industry, deposit developments have, of course, been and remain a focus matter. Leaving year-end volatility and outflows of public sector and financial institutions deposits behind, now in the first quarter, our net inflows were actually twice as high, supported also by corporate inflows. At the same time, we have maintained a very stable retail deposit base, not a small feat in times of high inflation and an abundance of higher-yielding investment alternatives. And the retail deposit mix also remained favorable. Yes, for sure, we have seen a continued trend towards savings and term deposits. However, sight deposits remained at a high 58% of the total retail deposit pie.
So our statement from the previous quarter stands. We have a unique, highly granular and stable deposit mix that puts us in a strong position when it comes to generating net interest income.
This brings me to Page 16 and net interest income on which I want to spend a little bit more time given the unprecedented dynamics. We posted a strong quarter with net interest income being up more than 27% year-on-year and roughly 5% adjusted for one-off effects, you remember TLTRO adjustments, on a sequential basis. The reasons for this performance are pretty much the same as last quarter. We saw another wave of rate hikes in the eurozone, which led to particularly positive effect in Austria, most notably in Erste Bank Oesterreich and the savings banks. Both segments benefit not only on the deposit side but also, to a significant extent, from loan repricing.
Despite new production in recent years, we talked about that quite often in the past, much more leaning towards the fixed rate loans, especially for retail mortgages, more than half of the existing loan stock are linked to money market rates, mainly the Euribor, of course.
Our bond book, consisting primarily to held-to-maturity government bonds from our region, by far the biggest being the Czech sovereign, produces additional significant NII tailwinds as maturing assets are reinvested at higher yields. Currently, the yield of the book stands at about 2.4%, average maturity around 4 years, and this will likely lead to an NII contribution north of EUR 1.3 billion in 2023. We have more information on the portfolios in a separate slide in the appendix in case you want to look at the details.
A key topic in the context of NII is clearly retail deposit pass-through. Willi already was touching upon that. It is a fair statement and not surprising that in all countries we see a rising trend here, but it is also a fact that in no country does the level of retail interest expenses exceed 20% of the respective Central Bank rate.
[Technical Difficulty]
Have we been dropping out?
Yes, please give me a moment.
All right. So you have to tell me, are we back in the call?
Yes. Just give me a moment. Dear speakers, we are back in the conference.
Okay. We are back in the conference. I do not exactly know when we lost our guests. Therefore, I am, to be on the safe side, I go back a little bit further than it might be necessary, I hope this is in everybody's interest, and restart with the bond book.
Our bond book consists primarily of held-to-maturity government bonds from our region, by far the biggest in the exposure is to the Czech sovereign, produces additional significant NII tailwinds as maturing assets are reinvested at higher yields. Currently, the yield of the book stands at 2.4%. Average maturity, just around 4 years, differing from country to country. And this will likely lead to an NII contribution of north of EUR 1.3 billion in 2023. More detailed information is available in the appendix in case you want to look at the details.
A key topic in the context of NII is clearly retail deposit pass-through. Willi already was touching upon this important point. It is a fair statement and not surprising at all that in all countries we see a rising trend here. But it is also a fact that in no country does the level of retail interest expenses exceed 20% of the respective Central Bank rate.
Among the closest to this, not surprising since the rate hike cycle started the earliest there, is Czechia, and this pretty much explains the weaker NII print that we have seen here. The sequential performance, however, is not as bad as it looks as the previous quarter, Q4 2022, was flattered by one-offs in the amount of EUR 25 million. I'm sure you remember our statements back then.
If we put all moving parts together, ranging from the consensus interest rate outlook, the slower loan growth, the bond book tailwinds, the rising but manageable retail deposit pass-through rates and the strong start to the year, then the guidance upgrade is, of course, more than warranted. Hence, we now expect NII to grow by about 15% in 2023 over 2022. And please don't forget, that comes on top of the almost 20% growth we posted last year.
On fee income, and that brings me now to Page 17. The one-sentence version would be pretty much everything as expected so far. Still, let me give you a little bit more color on the fee income components. Fees from payment services were up almost double digit year-on-year and also advanced versus Q4 2022 on solid transaction volumes and also price increases for account-related services. Very importantly, asset management fees improved as clients slowly returned to the market after a couple of very difficult quarters. This trend was even more evident in securities fees, which staged quite a good sequential recovery, particularly on higher client volumes in Austria, while still being down vis-a-vis, of course, the largely positive prewar quarters, if you remember the statements back then.
Lending, insurance, [indiscernible] bancassurance, and other fees developed solidly, happy to provide details in the Q&A if of interest. All in all, we confirm our mid-single fee income growth guidance for 2023.
Let's move on to costs on Page 18. Against our strong revenue performance, costs look even better with hardly any year-on-year increase. But there is a catch to it, of course. As most of you will remember, we had to pay extraordinary deposit insurance contribution of almost EUR 70 million in the first quarter of 2022 due to the Sberbank demise and contributions which we fully recovered in the course of 2022, and the last piece of it in 2023. This inflated our historical cost base. Adjusting for this and some small other one-offs, costs would have been up around about 7% Q1 2023 over Q1 2022.
Now this development notwithstanding, we slightly adjust our cost guidance upwards to reflect higher-than-budgeted wage settlements, in particular in Austria, around about 9% in its effect; the fact that currencies in Czechia and Hungary have appreciated quite a bit; and overall, core inflation across Europe seems to be more sticky than broadly anticipated. We now see operating expenses increasing by about 9% in 2023 over 2022.
On a sequential basis, just to mention, costs are up as usual as we always book annual deposit insurance contributions in one go in the first quarter of the year. This year, around EUR 113 million. All other cost items developed pretty much as expected.
Moving on to Page 19 now and the development of the cost/income ratio. The displayed upgrade of our cost/income ratio guidance to about 51% for 2023 is a logical consequence of the revenue cost mix we have explained.
Looking at the first quarter in isolation, operating result was at EUR 1.257 billion based on strong NII, solid fees, the continued recovery in trading and fair value result and expense growth in line with expectations.
That's all there is to say about operating results, and I hand over to Alexandra for all-important news on credit risk.
Thank you very much, Stefan. Good morning from Vienna. And please follow me on Page 20.
As Willi already mentioned, the overall credit risk environment stayed favorable also in the first quarter. We did not see any material hard defaults. Quite to the contrary, we rather experienced recoveries and rating upgrades. Consequently, we released risk costs in the order of 4 basis points. And in doing so, we have not resorted to releasing portfolio or FLI provisions. So in other words, our cushion for portfolio and macro deterioration is still fully intact with roughly EUR 900 million.
As a result of these positive developments, we adjusted our risk cost guidance for '23 downwards to lower than 25 basis points. You can interpret this move as a vote of confidence in the resilience of our entire credit portfolio, and I expressly include our real estate exposure in this statement about which I will give you some more details in a minute. Before, let's have a look at general asset quality on Page 21.
It's pretty much a reflection of what I said about risk costs. The NPL ratio continues to hover at multi-decade lows and provision coverage levels remain very healthy across the board. Looking towards year-end '23, we believe that the NPL ratio will remain below 2.5% and coverage will be around 90.
If you look at the stage split, there were no major changes, and I can only remind everybody about what I said last time: The elevated Stage 2 level is a direct result of portfolio overlays and FLI updates and not connected to actual portfolio deterioration. And as we have neither performed a new FLI update, nor changed any management overlays in Q1, the share of Stage 2 loans as well as the stage coverage was unchanged.
So all in all, credit risk situation is promising, and I can only repeat also from the previous quarters, we feel very well prepared for the challenges that the remainder of the year might have in store for us.
Let's now tackle real estate, and I'm on Page 22 now. We have received many questions over the past weeks on our real estate exposure, and I think there's quite -- or there could be some misunderstandings out there relating to the riskiness of this portfolio. Accordingly, we want to provide maximum transparency.
Firstly, let's get the numbers right. We are talking about an exposure of EUR 43.7 billion or 12% of Erste Group's total exposure. In terms of net customer loans, the amount is EUR 37.3 billion or 18% of net loans. This is what market participants refer to as commercial real estate and we call simply real estate in our exposure and loan reporting. So these figures do not include our mortgage business with private individuals who buy houses or build houses or buy apartments. This is another EUR 72.3 billion reported under private households. We do not see any issues with this business whatsoever as our customers overall have jobs. So labor markets are very strong. And generally speaking, our customers use these properties as their first residence. So I will leave this topic and this portfolio aside and focus on commercial real estate.
First of all, it needs to be mentioned that 40% of this exposure belongs to minority shareholders, effectively the owners of the savings banks.
Secondly, more than 50% of the total is residential real estate, and this business is almost exclusively an Austrian business, with an additional risk mitigating element that almost 1/3 is related to very low risk effectively, so far, 0 risk state subsidized housing associations. So irrespective on how we slice and dice this exposure, we do not expect this to become a major source of risk costs.
Thirdly, commercial real estate, in the narrow sense, accounting for more than 1/3 of exposure, is tilted towards lower-risk countries, again, Austria and also Czechia, and this is also very well diversified among asset classes.
Other real estate is a very granular business that includes a large number of smaller Austrian residential and commercial projects typically sponsored by the minority-owned savings banks.
And finally, I would like to say, as I have mentioned in many, many previous quarterly calls already for a very long time, we have adhered to sound and prudent lending standards all along, leading to a high collateralization level and the portfolio in very good, I can even say, prime locations.
If you're interested in more details, we've included 2 separate slides in the appendix on residential and commercial real estate. But in the interest of time, I will stop now and hand back to Stefan for the topics capital and funding.
Thanks, Alexandra. Let's first have a quick look on other results shown on Page 23. And there is the following points to mention. Across all entities, we booked the estimated resolution fund contribution, a total of just below EUR 140 million in the first quarter. Banking taxes have been booked in Austria pro rata, around about EUR 10 million, and in Hungary for the full year 2023 in the amount of EUR 72 million.
Here an important remark. The new law on calculation of the tax in -- this extra tax in Hungary does not change anything materially for Erste neither to the worst nor to the better.
And finally, to finish up the Hungary-related topics, the increased fair value of Hungarian operation led to negative valuation effect as a result of minority shareholder put option. This is what you find in the other part, or this gray part of the chart up on the left-hand side. We talk about around EUR 20 million for the quarter. You remember, this is quite swinging and volatile, this evaluation of the option.
The net result for the period in Q3 2023 (sic) [ Q1 2023 ], and this brings us to Page 24, is EUR 594 million, confirming our earnings per share growth trajectory you can see on the right-hand side.
The return on tangible equity guidance remains unchanged in the range of 13% to 15%. And Willi was already commenting about our ambition to achieve a result on the upper end of this range. And comfortably, and this is very important, this is above our cost of equity.
With this, let's now turn to funding and capital, starting on Page 26. I think we have talked about customer deposits already in length. Therefore, let's now focus on wholesale funding activities. We are assuring our MREL compliance and long-term liquidity needs with our issued debt securities volumes.
On Page 27, you find, as always, our updated maturity profile. Now what have we issued so far in 2023? We kicked off the year in January with a EUR 1 billion mortgage covered bond, 6-year maturity and combined with the EUR 750 million Green Senior Preferred bond, 8-year, non-call 7. This was followed by another EUR 1 billion mortgage covered bond in the -- with a maturity of 4.5 years, which we just printed now at the beginning of the second quarter in April. The focus of the upcoming months will be on MREL-eligible instruments, both in public and private placement format.
And just referring back to something that has been with us for quite a while through the crisis, TLTRO III, we have updated here the numbers. EUR 15.2 billion is the currently outstanding amount. And this will reduce already actually in Q2, Q3, down to the number we give you here for the year-end, EUR 6.8 billion, by maturing tranches.
We will update you throughout the year on progress on MREL issuance, of course, and the latest overview you find on Page 28. Therefore, let's turn to the Basel III capital on the left-hand side of Page 29.
Please be aware that the Q1 interim profit is not included in the numbers. As always, this is to happen then with the half-year results. No changes on AT1. The next call date of an outstanding issue is April 2024, so plenty of time for us to take the right steps when appropriate.
What might have been catching your attention is the fact that credit RWAs have increased in the first quarter by EUR 3 billion, although the loan to customers have only grown by EUR 700 million roundabout. The key reason was the mix between new business versus the redemption in the corporate business. While the new business was leaning towards specialized lending and other above-average RWA heavy business, a few large sovereign repayments with low risk weights took place. So the key message here is, the overall RWA density remains stable. Market risk RWAs were slightly down in Q1 and no changes actually on the operational risk RWAs.
Last but not least from my side, I would like to comment on the Q1 CET1 waterfall which we show on Page 30. The pro forma CET1 rises to 14.4%. This includes the first quarter profit of EUR 594 million and technical pro rata dividend deduction of EUR 0.62 per share, following the midpoint of our dividend policy. This is obviously not a guidance for the dividend but simply a technical deduction that enables us to do the pro forma calculation. As usual, we will be firmer on the topic of dividends as part of our Q2 2023 reporting.
And with this, I turn it over to Willi again for the financial outlook and conclusions.
Thank you, Stefan. I'm concluding this presentation with our upgraded financial outlook for '23 on Page 32. I think it was evident from this presentation that Erste Group has made a strong start to the year and is well equipped to handle challenges. As a result of this, we have reviewed a guidance that was already a very robust one and upgraded some key line items.
We now see net interest income rising by about 15% rather than 10%. As already mentioned, this is very much driven by rate hike dynamics in the eurozone combined with rising but still moderate deposit pass-through expectation.
On the flip side, we also made an adjustment on our cost forecast in order to reflect inflation reality. Despite this, we are in a position to once again upgrade our cost/income ratio to a very respectable 51% in '23.
And of course, let's not forget about risk costs. The performance in the first quarter also warrants a full year upgrade to less than 25 basis points, down from 35.
Our return on tangible equity guidance remains unchanged. But clearly, with the changes we made, we rather target the upper end of this range of 13% to 15%. Add to this that we expect a strong capital build this year that will expand our flexibility as regards capital return and we once again have a pretty strong package in front of us.
Ladies and gentlemen, thanks for your attention. We are now ready to take your questions.
[Operator Instructions] We will take our first question from Mehmet Sevim from JPMorgan.
I'll have a few questions focusing on the NII, please. Firstly, comparing your 15% NII growth guidance with the run rate from the first quarter, I think this would imply that we may have reached the peak NII already. Would you agree with that statement? Or would you see room for NII to grow further from here and therefore the guidance being on the conservative side?
Secondly, one question on Hungary, please, given the NII there jumped quite visibly this quarter. Could you please provide more color on the drivers of this very strong growth? Also maybe taking into account the negative elements there, like the rate caps and higher Central Bank reserve requirements, et cetera. And given this jump in NII, should we think -- how should we think about the quarterly trajectory in Hungary from here?
And finally, if I may, could you also talk about the quarterly drop in Other Austria, which is structurally a higher [ LDR ] segment, but I think it's still surprising. Again, what are the drivers there?
Yes. Thank you very much for the questions. Not very surprisingly, to be honest. So let's start with the general NII question. Now I think it's fair to say that there are a lot of moving parts contributing to the overall consolidated NII. And I would not dare to call a peak NII, be it for this or forthcoming quarters. Personally, I would expect that we have not yet seen the peak, but rather that might come in either Q2 or Q3, at least when it comes to the year 2023.
However, don't forget the impact of many other points that are not only directly related to the key rate, i.e., the ECB rate. By the way, our opinion, as I think Willi described in the macro, is that we will go to 4% and then let's see what the track will be further.
We are assuming to have seen the peak, for sure, in some of our markets, for example, in Czech Republic, that's quite obvious. Maybe also in some of the other CE countries in euroland, for sure, [ note ] and how this consolidates in the overall picture, let's see.
In Hungary, we clearly have a very strong impact of the minimum reserve play. This is something I'm sure you have been following. There was a massive increase in the minimum reserve requirements. And this is something which is new to be evaluated, and we will see what the impact will be on our business concretely. So yes, enormous volatility and rather on the, let me say, lower side to be expected for the forthcoming quarters.
And last but not least, in the Other Austria segment, there was a significant impact also from the money market activities, so not so much the lending business, but rather coming from the treasury business which was outstandingly strong in the fourth quarter and now has been moderating again in the first quarter.
And just one clarification to an earlier comment you made. I'm not sure if I got it right, but I think you mentioned that in none of the operating countries deposit costs exceed 20% of the relevant policy rate. Did I hear this correctly? Because for countries like the Czech Republic, that would be surprising.
Yes, retail. Retail. So maybe I was not specific enough. You're right, the statement I made, so thanks very much for the clarifying question. That's the retail pass-through so far. And this might -- we might be crossing also that level as we speak in Czech Republic. But for retail, that has been true so far, yes.
Thank you. We will move on with our next participant, Gabor Kemeny from Autonomous Research.
I would start with cost and particularly the wage agreement that I think you mentioned, that the Austrian agreement for this year turned out to be a little higher than we expected. Can you talk a bit about that? What drove the updrift? And what is the likelihood that we will see some kind of further updrift in the wages, further unexpected updrift during the rest of the year. That's the first question.
Second one is Czech bank tax. I think you haven't moved anything yet. What are your expectations there? And does the ROE guidance still assume, I think it was up to EUR 100 million payment for this year, is the second one.
And the other one, yes, I think you mentioned a EUR 1.3 billion NII contribution from the securities portfolio this year. Can you remind us what was it in '22?
Gabor, so one after the other. Wage agreements, yes, that's absolutely correct. Now I can specify my comment. We were building in -- I think we talked about it, I don't remember 100%, but we talked about it that our expectation was around about 8% for a long time. Now since the average CPI for the year 2022, which is exactly the basis for the negotiations of the collective agreement, ended at 8.6%, the negotiations obviously of our colleagues were quite tough to do. And the outcome, ultimately, if you read the headlines of the units, it was a little bit different number. But I think the translation into our real costs, of course, annualized are nearly 9%. So it's 8.8% something because, of course, the contracts are not one-to-one always connected to the collective agreement.
So that means this was round about a percentage point higher than we anticipated when we were going for the original guidance. And that was the one part.
And the other part, don't forget that this is an equally important point, if you look at the updates of inflation all across Europe, everything is now about at least 1.5, if not 2 percentage points higher than what was originally expected. And all of that factored in, we have been adjusting the guidance here. So that's number one. I hope that covers the point on the collective agreements.
You asked what, do we expect more to come? Look, this is very hard to say. At the end of the day, it depends on the average of 2023 when it comes to Austria. This will be the basis next year. We definitely expect this number to be lower, I don't know what, let's say, 5%, 6%. And this will then be the basis for the next year's negotiations. But there is nothing on top to come for the year 2023 for sure and also not for the first quarter of 2024.
Czech banking tax, we have factored into the Czech tax rate some elements of it. So I know that some competitors took it out completely. Look, political developments are always hard to predict. So we have simply been sticking to what we always have been saying. So take it as a rather conservative approach which, at the end of the day, leads to the total, total group-wide tax rate of 18.5% in the first quarter.
And last question, EUR 1.3 billion, 2023, that's very quickly to be answered, round about EUR 1 billion. So the contribution of the bond book is about EUR 250 million to EUR 300 million more than in 2022.
Thank you, Stefan. Just a quick clarification here. So the ROE guidance assumes EUR 100 million Czech bank tax or something else?
The point which is not so easy, one-to-one, to translate. We always have been saying this was our assumption and nothing has changed. However, if you know -- if you're familiar with the consolidation of a tax rate across the full group, then you will agree that this is not a one-to-one translation. So in other words, we have still an assumption that there might become -- something coming up, and our assumptions have not changed over time. So not getting worse, not getting better. If there is the result at the end like some others are assuming, that nothing will come, yes, then it will be turning better.
Thank you. We will move on with our next participant, Andrea Vercellone from BNP Exane.
A follow-up on the discussion on Czech bank levy. Did I understand correctly that you made an accrual of x, nothing has been paid. So you will redo the calculations at the end of the year. If something is due, you'll pay. If it's not due or less or more is due than what you have accrued, you will just adjust in Q4. Is that correct or not?
Then also on the Czech Republic, you now bought the Sberbank portfolio for around EUR 250 million lower than nominal value. Can you just clarify for us what are the accounting implications for this in terms of P&L booking, capital booking, impact on bank levy. It's not clear to me if it's taxable or not and if you had a one-off positive in the P&L.
And finally, on risk-weighted assets, in your interim document, I read it quickly, but I think you mentioned that the IRB methodology in [indiscernible] might finally be approved. And so you will consequently reassess or not the add-on you currently have there. Can you just let us know if there's any expected negative or positive coming from that and remind us of what the size of the add-on is.
Thanks very much for the questions. I cover the first two.
So on Czech banking tax, it's very clear, also agree with our Czech colleagues, should there be a final political statement earlier through the year, then of course we will account for it immediately. Other than that, your assumption is precisely right.
Sber, very importantly, nothing is in, in the Q1 for the simple reason that the final closing took place beginning of April. So everything will be factored in, in the course of the second quarter and we'll report on it. But there will be hardly any impact on the likes of banking taxes or so. And also the overall impact for the 2023 numbers will be immaterial, very likely.
Alexandra, please.
Yes. Now to your question on [indiscernible] IRB. This was a very long journey, which now hopefully comes to a positive end as the IRB implementation will be approved. So overall, to remind you, the add-on was EUR 2.1 billion which we had on group level. We expect this being approved and also implemented this year. The overall impact is, for sure, not negative. Neutral to -- we are still working on it, maybe slightly positive, but overall neutral.
Okay. Just a follow-up again on Sberbank Czech. In order to have a neutral impact, you need to write down the portfolio by EUR 250 million. Is that correct?
No, that's not correct. That's not correct. How do you...
How can you be neutral then, at least in capital.
We have been buying the portfolio way below book, so I don't know how you get to your assumption.
But that's what I mean, it should be positive.
But on the -- you were talking about the group capital position, right? So we're talking about the group capital position. It will not be influenced by the transaction here locally. There's no -- on that level here. So we will, of course...
Okay. I'll follow up separately.
Yes, sure, absolutely, no problem. We will, of course, seek, as Willi has said a couple of times in the calls, it's -- we expect -- and this is also true for this transaction, we expect a positive contribution latest in the third year, most likely already in the second year of acquisition. And we will go into more details in the second quarter, no worries. We'll pick it up and go into the details in the second quarter on the Sberbank integration and consolidation. Let's take it from there, okay?
Thank you. We will take our next question from Máté Nemes from UBS.
Yes. I have 3 questions, please. The first 2 on NII and third on asset quality.
Firstly, could you perhaps run us through the assumptions on the key rates and the timing of any changes in the main operating countries in the eurozone, the Czech Republic, Hungary and Romania. And apologies if you mentioned this, I lost you for a little time.
The second question is on Czech NII. I think there was a sequential drop of around 10% in the first quarter. Could you discuss the drivers behind this and to what extent this is indicative in the next couple of quarters?
And the last question is on asset quality. You've lowered your risk guidance by about 10 basis points and Q1, you saw natural eases. So clearly, asset quality is holding up very well. I'm just wondering if you could give us an update on your thinking around the potential release of some of the EUR 900 million reserves, the portfolio reserves and FLI provisions.
All right. Let's start with the assumptions on the key rates. So what we have been building in, in the upgraded and updated guidance are the following assumptions. Let me reiterate that it's by far not only the key rates, it's the shape of the curve, it's credit spread, it's many, many other things that -- and you all know that, of course, that are critical in terms of driving the NII, just to repeat that.
So the assumptions there are -- let's start with the big countries. Eurozone, we expect the ECB to go to 4% and hold there. Obviously, in the next 2 meetings, twice 25 bps, that's our assumption, which is pretty much in line with market assumptions.
Czech rates, I mean you know that in the past, many analysts were expecting it to be cut much earlier. At the moment, we don't expect this to happen anytime soon in the sense of not in Q2, maybe in Q3. And towards the end of the year, we would assume that there will be something like the lower end of 6%. But again, this is a very questionable -- that is a very, very questionable assumption by the whole market because, as you well know, the Czech inflation is extremely sticky. And only if the inflation, I think National Bank has been vocal about that, only if the inflation is really dropping substantially then they will start a cutting cycle.
Hungary, I don't think we need to talk about too much. This is actually a little bit decoupled from inflation. They took some action earlier this week. We expect some cuts there towards the, let's say, 10% area. However, Hungary is driven by many other elements.
We assume the Romanian National Bank to hold for the foreseeable future at the level of 7%. So nothing to expect there.
And last but not least, we didn't talk about Serbia yet today, same there. We expect them to hold at 6%.
Czech NII, you were asking about, yes, for the quarterly change. So this gives me the opportunity to repeat myself when it comes to the Q4 2022. There was an impact of around about EUR 25 million in the fourth quarter positively, which, of course, makes quarterly comparison look even worse than it actually is. Let's be very clear. We have been seeing the peak in Czech NII absolutely clearly in the last year already and we will not get back to these levels in the year 2023. However, we also, in the same moment, are not expecting further drops to be that accelerated. We expect the stabilization. We have good new business, as was mentioned by Willi in his presentation, and we expect a certain stabilization so that the year-on-year comparison might look a little bit better at the end.
And now to your question on how much would we expect that we release from the mentioned EUR 900 million. So quite in line with what we have said previously, so not so much. Some releases, but you -- so to share our expectation, the release should not be more than 20% to 25% of this EUR 900 million. And rather from stage overlay releases, which would expect more than releases from the FLI.
Thank you. We will move on with our next participant, Johannes Thormann from HSBC.
One question, just on your commercial real estate exposure first. The -- if you look at the 36% of the EUR 44 billion commercial real estate exposure, what asset class within that troubles you the most? And where do you see the highest risk of additional provisioning needs? And then probably in this context also, on your risk costs, is this still a likely scenario of 25 bps? Or do you still like when you said last quarter, the 35 bps might be revised downwards again. What is your current outlook on that?
And last one, easy one on the tax rate. As we had slightly higher tax rate in this quarter, what is your expectation for the full year?
Let me start on the 25 bps guidance. As we have discussed in the -- a few minutes ago, this only -- this 25 bps maximum guidance only includes a small part of FLI and stage overlay releases. So to put it in other words, it makes me very comfortable that we can keep this already revised downwards guidance.
I would not -- I mean if the upcoming quarters continue as the current quarter, of course, I would not exclude any revision, but this we will then do when the time comes. But overall, I feel very comfortable with the below 25 bps.
On the asset classes, as you also can see from the slides in the appendix, what we have mentioned, the prudent lending standards, the high collateralization levels, the very good locations, so prime locations, the high LTV, the principle of having fully ring-fenced financing, this applies to all the asset classes in commercial real estate. So there is no specific asset class where I would be worried. Also so far, we do not see any refinancing topics with our clients. But of course, we are monitoring the portfolios very closely as we have also done it in the previous quarters. But I could not name 1 asset class or sub-asset class which would worry us particularly.
Sorry if I interrupt here. On the -- even on office, quite relaxed or not more like logistics or retail commercial retail lending.
Yes, especially offices, for many, many years, we have focused on A-class objects and really prime location. So office is not worrying us.
On the tax rate, I would name 3 points. The one we have already discussed in answering the former questions. The Czech -- the final turnout of the Czech banking tax plays a role. And then very importantly, what will happen overall in the Austrian tax group. That's a main driver of the total tax rate.
And if you look at the last couple of years, last year, we were finishing the year at the end with 17.2% based on an excellent pretax result. And if we get to similar or even higher levels, it could go into this direction. But at the moment, that's why we put exactly this number in, 18.5% is a very good assumption which you can operate with. And throughout the year, we will update it as we go.
Thank you. We'll move on with our next participant, Riccardo Rovere from Mediobanca.
I have 2 or 3, if I may. The first one is on the deposit beta. If I understand correctly, Stefan, you mentioned around 20% or actually less than 20% across the various countries in which Erste operates. Now in Czech Republic and in Hungary, the tightening cycle started 2 years ago or so. After 2 years and after rates have been pushed to 7%, well above 10% in Hungary, what we have seen today in terms of deposit beta do you think is what we will see? So after 2 years, the cost of the deposits is there and it's not going to change? Just -- and if in case, should we eventually use that as a read across for the rest of the countries? This is my first question.
The second question I have is for Alexandra. If I think about 1 year ago, the situation on the asset quality side was supposed to turn out to be much wider than it seems to be. Also from -- purely from a qualitative standpoint, what is not happening on the ground that we should -- or that we were expecting, we, market participants, and maybe you, too, were expecting to happen, what is going definitely much better than expected?
And then the third question I have is on the use of capital. Is growth organic or bolt-on acquisition still the preferred way to use your capital? Meaning that you would always look at after opportunities and then share buybacks comes at the second stage, just a confirmation or maybe not, on that.
Thanks, Riccardo. I think it's a good question. Is the Czech situation, so to say, the model for what will happen in a couple of other countries? Now my clear assessment after having analyzed with my colleagues and also very much going into all the details what happens in the market is partially yes, but to a significant part not. What is definitely to be expected, and I would say it happens as we speak, is that the start of the repricing in the eurozone, which is the other huge impact on our P&L, of course, is ongoing. Now we start, I think next week, we'll also -- just to be very open on that, we will definitely do something on our side when the ECB moves next week in order to be right there where we want to be in the market when it comes to deposit pricing for our clients.
Now there are a couple of very good reasons why other elements are not to be copy pasted from the Czech situation to other countries. First, the magnitude. I don't think that there is any opinion out there in the market that will see ECB rates going up to anything close to the 7% level. That's simply in terms of the absolute numbers, in terms of the impact when someone is transferring volume from sight deposits to term deposits is a completely different game. So in the absolute numbers, it definitely is not comparable by any means.
And the third thing is coming back to something I repeatedly have been mentioning. Look at the Czech curve. The Czech curve is brutally inverted. That is something which is, of course, especially over time, very painful for banks. And this is something which we do not expect in that magnitude for the other countries, in particular not for the eurozone.
So those are these kind of comparable and not comparable arguments I would give you. And we will see how the next couple of months will develop across especially euro countries, but also the countries the likes of Romania or Hungary.
Now to your question on...
Sorry to interrupt you, Stefan. Sorry to interrupt you. I'm not sure I understand it correctly. So you think that -- okay, ECB is going to do something more, we all know that, [ 3, the 25 ], whatever. You think that what we will see on the deposit side is going to be visible over the next few months and then done. I'm not sure I understood it correctly.
The point I'm making, the point I'm making, Riccardo, thanks for coming back on clarification. If you have someone who has his money on a 0 rate overnight deposit and then decides at a certain point in time to go for a 1-year or 2-year saving book or savings deposit or a term deposit, it makes a big difference for both the person as well as the bank whether the jump is from 0 to like nowadays in Czechia, 4.5%, 5%, if not 5.5%. Or like we expected in euros, euro country, to be maybe to 1.5%, here and there to 2% or 2.5%, depending on how far the ECB goes. That's what I was mentioning.
We expect the percentage of clients to move step-by-step over the upcoming months to be maybe similar to the Czech situation. By the way, 1 correction to your question, you said the rate hike cycle started. That's -- you were mixing up, I think, rate hike cycle in Czech Republic. This is absolutely correct. It started in June 2021. But the deposit repricing actually only started 3 to 4 quarters later. So I think that's something we should not mix up here.
So now to your question, what is not happening on the ground, and I'm very happy to answer this, so what is not happening is hard defaults. So neither in the corporate business nor in the retail business.
The uncertainties in the energy supply that we, as I said, 1 year ago already had in our mind and we are also considering, have not materialized, so they have eased. The stress on the supply chain that we have seen some time ago also has not translated into portfolio deterioration or into serious problems for our clients. And also, the labor market has not in the least been depressed. So super strong labor market.
So what was -- to answer in line with the question, what has not happened, that the labor market has been impacted. And also last but not least, the higher interest rates have -- referring to the retail portfolio, have not translated into portfolio deteriorations or increase in defaults.
And Alexandra, if I may, because at the very, very -- on the last part of your question or maybe also on the energy prices, you say, okay, it went up a lot, but then they came down. And the amount of time when the energy prices were that kind of unbearable was relatively short in terms 2, 3, 4 months or so. And on the retail side, you are basically saying, okay, rates have gone up, they're not producing any, let's say, big problem because rates have gone up, or they're going up from 0. So 3% or whatever it's going to be in the euro area is kind of normal, well, let's say, inverted commas, 'normal rate'. So nothing that's -- nothing shocking. Let's put it, nothing -- something that 15 years ago or 10 years ago we would consider something like normal. Is that fair?
I'd like to put into perspective first. So I was also referring to the uncertainty on the energy supply, which now is showing a completely different or I think a much better picture. High energy prices, when it comes to our corporate clients, they have been able to pass through the higher costs to their customers. And when it comes retail clients, as you said, yes, this is a fair assumption. So wages have gone up, people have kept their jobs, and what also plays a role that when we grant variable interest rate loans, we always apply before granting the loan a stress scenario for increased interest rates and this covers very well the interest rate development that we see so far.
I want to come back to your third question, capital. I think nothing new. First priority is always allocated to organic growth and our commitment to our dividend policy. Secondly, bolt-on acquisitions, as we were able to demonstrate. And finally, we always stated in case there is a further consolidation to be expected in our core markets, we see ourselves as an active player. Everything under the prerequisite that we are able to add value and not just to deal with legacy. And share buyback, we should not forget, as already mentioned today during the course of our presentation.
Thank you, Riccardo. [Operator Instructions] We will move on with our next participant, Krishnendra Dubey from Barclays.
This is Krishnendra from Barclays. I have 3 questions. Sorry to keep coming back on NII. On the NII, I just wanted to check if there is no one-off in the Q1 numbers. And I guess earlier 2 questions, you highlighted the Q2 or Q3 should see a peak in terms of the NII. So the question that I'm trying to gauge here is, what is the headwind that I'm missing here? If I look at the Q1 number, you should have higher than 15% for the year. So what's the headwind that I'm missing here?
Second question is on the cost. You highlighted the cost to be plus 9% this year with some offsetting measures. So what are those offsetting measures? And if those weren't in place, what would have been the cost growth Y-o-Y?
The last question is on AT1. I think you have referred to this earlier in the call. So what is your approach to the call policy for AT1 given the challenging market conditions and if you decide to frontload the financing of AT1 by the end of this year as it is callable in April? So if you could answer those 3.
Krishnendra, let's start with a very simple one, no whatsoever one-off in the first quarter. So it's really, probably looking back the couple of quarters, the cleanest NII quarter that we have had for a long time.
The peak, you will not find me calling a peak here because there are so many moving parts and I would really not rule out. Remember the times when we were for a couple of actually years even, we were sailing on increasing income on the back of this statement that Thomas and I have always put together, NII piece, NIM, we were at fantastic loan book growth and therefore we could beat, so to say, the shrinking margins. For example, we do not rule out that we will see different margin environment in the couple of quarters to come. And I mentioned a couple of times already, and I have to repeat it, that the shape of the curve will play a significant role.
So it's definitely the key rates that are very important drivers, but definitely also not the only one. So yes, the growth of -- that's obvious, that the growth dynamics are going to slow down very soon and actually already are slowing down, that's why we are on the back of a 27% year-on-year Q1 versus Q1, now saying around about 15%. And therefore, our overall guidance is a prudent one. I wouldn't call it explicitly conservative, but it's the one which we, to the best of our knowledge, are putting out today.
Costs? Well, if I got your question right, is what have been the mitigating measures that we are undertaking. Now 2 comments on that. One, very importantly, on Czech Republic. The colleagues there, and we highly appreciated that, have been using this fantastic income revenue years and quarters for investing into our future, into our digital future with regard to our clients in re -- let me say, refurbishing their IT architecture, and that is something which is very intensively driven forward. In the same moment, they know that on the cost side, there is something to do and we will see measures there. So one part of the mitigating element is certainly coming from the Czech Republic and the colleagues are working on that.
The other part is -- and Willi has been mentioning it, I think already in the full year call for 2022, end of February, that in Austria, on the back of the very high collective agreement results, we are targeting to mitigate the cost updrift by round about keeping 1/3 of those costs under, so to say, efficiency measures. And this is the other element that pays in. So that's covering the 2 biggest markets. Obviously, it will -- colleagues in the other countries also will have to contribute to efficiency.
That brings me to AT1, thanks very much for the question. Obviously, everything always depends on the market situation. I think everyone, every CFO, every Board member will say this when it comes to whether you would call or not call an AT1 transaction. That's, I think, obligatory.
Having said this, you can be sure that our debt and AT1 investors can rely on a very consistent and very reliable behavior. So most likely, we will be starting to talk to the market then towards the autumn of this year in order to be more precise on what we are going to do in replacing the AT1 and what kind of measures we will undertake. As I mentioned already in the presentation, we have plenty of time to make our considerations.
[Operator Instructions] We will take our next question from Hai Le Phuong from Concorde.
I have a question on deposits. Sorry, if it was already answered because I got disconnected for a while. So I observed that in Austria, except for Other Austria, on a quarterly basis there was a small decline. And I was wondering if this would continue and at this pace for the rest of the year. And I was wondering if you could tell us what was the FX adjusted deposit dynamic in the CEE region, so ex Austria.
So if I -- the line was not very good, but I think the question was on Other Austria and it was for the asset side, correct? So not deposit.
No, no. I was -- no, it's ex Austria. So except for Other Austria, other or like rest of the group. So if we are not taking into account Other Austria, then the Austrian segment deposits declined quarterly. And I was wondering if this is within your guidance range or your expectations or will we see an acceleration in deposit outflows?
You're referring to the development in the Austrian Hemisphere, savings banks and Erste Bank Oesterreich, right? This is what you're referring to, so Page 15?
Yes. Yes.
Okay. Thanks. Sorry for taking a little bit of time of clarification. No, look, we don't expect any particular bigger in or outflows here. It's broadly stable, as we comment. Yes, there was a little bit of a deviation. But if you look at the savings banks, they actually had on a quarterly basis even inflow, and that's what we expect. This is very, very strong, very stable. So nothing in particular to, so to say, consider and comment here. Therefore, I was asking about Other Austria, because Other Austria obviously is driven not by retail deposits. So that's -- for Austrian savings banks, we rather expect even additional inflows in the next couple of quarters, but let's see. It's stable overall.
The other point was on -- help me, please?
Yes. It's on the CEE region because there was a currency appreciation during the quarter, so I was wondering if you adjust for that and what was the deposit dynamic?
Yes. So when it comes to currency volatility, you saw enormously strong performance of the CEE currency, in particular the Hungarian forint. After being relatively weak in the fourth quarter, it recovered strongly. Czech koruna equally so. This is usually not having any dramatic impact on the local behavior of the deposit gathering. That's more or less locally driven. But of course, it is important when it comes to the consolidation into our euro overall result. It plays a role in all lines.
[Operator Instructions] Dear speakers, it appears there is no further questions at this time. I'd like to turn the conference back to Willi Cernko for any additional or closing remarks. Thank you.
Yes. Thank you very much. I just want to use the opportunity to draw your attention to 2 events that are upcoming. The first one is our AGM. It is going to take place on the 12th of May. And we are going to present our first half year results of '23, on Monday, the 31st of July.
So many, many thanks for your participation and have a nice day. Have a nice weekend. Thank you very much.
Thank you for joining today's call. You may now disconnect. Have a nice day.